5.3 Does the stock price equal the theoretical ex-rights price at the closing of Stock Exchange on the

5.3.4 Extreme deviations from TERP

The stock price of Ixonos has been trading at a substantial premium after its two rights offerings (1/2013 and 12/2013) with the magnitude being 65,4 percent in the first and 83,9% in the latter. In the first offering the stock price acted very strangely since it actually increased on the opening hours of the ex- rights date after adjusting downwards but still closing at a 65,4 percent premium to TERP. The stock price declined on the following days but still remained overvalued by 20 percent at the closing on Friday 25th of January. The stock price fell below TERP 1,66 EUR on March 14 over one month after the offering was completed. The stock price development of Ixonos is presented in Table 14.

Table 14:

Ixonos’ (1/2013) stock price and premium (discount) to TERP

In the second rights offering the stock price opened at 0,12 EUR on the ex-rights day, trading at 16 percent premium to TERP but again rose to 0,23 EUR (123 percent premium) at highest on the same day before closing at 0,19 EUR with 83,9 percent premium. The share price remained clearly above the TERP for the whole duration of the offering and equaled 45,2 percent on December 4 when the new shares started to trade in OMXH. On December 9, two trading days after the trading had begun, the stock price fell under the TERP and closed at 0,09 EUR remaining under TERP 0,103 EUR for the rest of the year. The stock price development of Ixonos (11/2013) during the offering is presented in Table 15.

8.2.2013 1,950 1,800 1,850 11,3 % New shares start to trade in OM XH 31.1.2013 2,050 1,850 2,000 20,3 % Subsciption period ends

30.1.2013 1,900 1,850 1,850 11,3 % Trading on rights ends 29.1.2013 1,900 1,800 1,900 14,3 %

28.1.2013 2,000 1,850 1,950 17,3 % 25.1.2013 2,200 1,850 2,000 20,3 %

24.1.2013 2,400 2,050 2,200 32,3 % Subscription period starts, rights start to trade 17.1.2013 3,400 2,150 2,750 65,4 % Ex-rights date

16.1.2013 3,600 3,250 3,550 113,5 % Announcement date 15.1.2013 4,150 3,500 3,600 116,5 % Announcement date -1

Description Date High Low Close

Premium (discount) at close

Table 15:

Ixonos’ (11/2013) stock price and premium (discount) to TERP

The rights offerings of Ixonos completed in the end of 2013 could have provided an attractive opportunity for investors to benefit from the mispricing. The EMH argues that the arbitrageurs attempts to gain from mispricing drives the stock price to its “correct” level but that has not been the case in the two offerings. There is no rational explanation for the behavior of Ixonos’ share price during the two rights offerings. Turvatiimi’s rights offering in 2012 is unique in the sample when it comes to premium to TERP or stock price behavior in general during the offering. The offering was performed in order to pay off maturing debt and to strengthen the company’s balance sheet, the offering had binding undertaken subscriptions (or commitments) accounting for over 90 percent of the issue.

The stock price closed at 0,08 EUR on the ex-rights date, with a staggering 482 percent premium over TERP. During the following week, the stock price fluctuated between 0,08 EUR to 0,03 EUR with the minimum premium equaling 118 percent. Similar to the offerings of Ixonos, Turvatiimi’s share price offered the arbitrageurs potential for enormous abnormal percentage gains (but not necessarily in monetary terms). The share price closed at 0,02 EUR on the last trading day of 2012. The stock price development of Turvatiimi during the offering is presented in Table 16.

4.12.2013 0,150 0,120 0,150 45,2 % New shares start to trade in OM XH 3.12.2013 0,140 0,120 0,140 35,5 % Subsciption period ends

26.11.2013 0,140 0,130 0,140 35,5 % Trading on rights ends 25.11.2013 0,150 0,120 0,130 25,8 %

22.11.2013 0,150 0,130 0,150 45,2 % 21.11.2013 0,180 0,140 0,150 45,2 % 20.11.2013 0,160 0,140 0,140 35,5 %

19.11.2013 0,190 0,120 0,140 35,5 % Subscription period starts, rights start to trade 12.11.2013 0,230 0,120 0,190 83,9 % Ex-rights date

11.11.2013 0,480 0,430 0,430 316,1 % Announcement date 8.11.2013 0,480 0,460 0,470 354,8 % Announcement date -1

Date High Low Close

Premium

Table 16:

Turvatiimi’s stock price and premium (discount) to TERP

Large premiums seem to be more common than large discounts, according to this data sample. From the offerings where the ex-rights date is one trading day after the announcement date, the largest discount equals 16,7 percent (Cencorp). In Cencorp’s case, the stock price did not reach its TERP level 0,179 EUR during the offering and in fact, it has failed to rise above 0,14 EUR until the end of 2013. Thus, an investor who would have tried to profit from Cencorp’s possible misvaluation would not have succeeded. Cencorp’s stock price development is presented in Table 17.

Table 17:

Cencorp’s stock price and premium (discount) to TERP

19.9.2012 0,040 0,030 0,040 190,9 % New shares start to trade in OM XH 11.9.2012 0,050 0,030 0,040 190,9 % Subsciption period ends

10.9.2012 0,050 0,040 0,050 263,6 % Trading on rights ends 7.9.2012 0,050 0,040 0,040 190,9 %

6.9.2012 0,050 0,030 0,040 190,9 % 5.9.2012 0,050 0,040 0,040 190,9 % 4.9.2012 0,060 0,040 0,050 263,6 %

3.9.2012 0,060 0,050 0,060 336,4 % Subscription period starts, rights start to trade 27.8.2012 0,080 0,050 0,080 481,8 % Ex-rights date

24.8.2012 0,025 0,021 0,025 81,8 % Announcement date 23.8.2012 0,025 0,025 0,025 81,8 % Announcement date -1

Description Date High Low Close

Premium (discount) at close

4.4.2011 0,140 0,130 0,130 -27,5 % New shares start to trade in OM XH 24.3.2011 0,130 0,130 0,130 -27,5 % Subsciption period ends

17.3.2011 0,130 0,130 0,130 -27,5 % Trading on rights ends 16.3.2011 0,130 0,120 0,120 -33,1 % 15.3.2011 0,140 0,120 0,130 -27,5 % 14.3.2011 0,140 0,130 0,130 -27,5 % 11.3.2011 0,140 0,130 0,140 -21,9 % 10.3.2011 0,150 0,130 0,140 -21,9 % 9.3.2011 0,150 0,140 0,150 -16,3 %

8.3.2011 0,140 0,140 0,140 -21,9 % Subscription period starts, rights start to trade 21.2.2011 0,160 0,150 0,150 -16,3 % Ex-rights date 18.2.2011 0,176 0,156 0,156 -12,9 % Announcement date 17.2.2011 0,195 0,166 0,186 3,5 % Announcement date -1 Premium (discount) at close Close Low High Date Description

If no offerings are excluded from the data, the largest discount is experienced in Pohjola’s rights offering in 2009 (-34,8 percent). The magnitude of the discount is explained by Pohjola’s stock price development between Announcement date -1 and Ex-rights date -1, during which the stock price plummeted 39 percent from 9,19 EUR to 5,62 EUR due to issues related to financial crisis.

5.3.5 Conclusion

The data provides proof of substantial misvaluations, when measured with comparing the ex-rights price to TERP. The evidence does not imply that OMXH Stock Exchange has lost its efficiency, although a few stocks were trading at very dubious levels during the offering. While Fama (1998) argues that overreactions and underreactions are equally common on the market, the data does, however provide contradicting results; in 27 instances the stock price under-reacted to the de-attachment of subscription rights, while in only 9 instances the market overreacted.

Possible explanations for the stock price behavior of Ixonos and Turvatiimi include the following theories: i) companies with small market capitalizations are of low interest to large multinational institutional investors, which can be though to lead to a less efficient pricing and ii) while the potential percentage gains are large, in terms of monetary value, the stock of e.g. Turvatiimi does not provide potential for large gains due to the low market capitalization.

In the following and final section of the chapter the market values of subscription rights are compared to their fundamental values and mispricings are discussed and analyzed.

5.4 Does OMX Helsinki Stock Exchange work efficiently in determining the value of

In document Pricing errors in ginnish rights offerings? - Implications for market efficiency in NASDAQ OMX Helsinki (Page 54-57)